Prestige without Purpose? Reputation, Differentiation, and Pricing in U.S. Equity Underwriting
64 Pages Posted: 2 Oct 2013 Last revised: 9 Mar 2016
Date Written: June 5, 2014
Clustering of IPO underwriting spreads at 7% poses two important puzzles: Is the market for U.S. equity underwriting services anti-competitive and why do equity underwriters invest in reputation-building? This study resolves both puzzles. Modeling endogeneity of firm-underwriter choice using a two-sided matching approach, we provide strong evidence of price and service differentiation based on underwriter reputation. High-reputation banks receive average reputational premia equaling 0.65% (0.47%) of average IPO (SEO) underwritten proceeds, which constitutes 10% (13%) of their underwriting spreads. Equity issuers working with high-reputation underwriters receive significant benefits, including higher offer values and lower percentage spreads net of reputational premia.
Keywords: Equity underwriting; underwriter reputation; vertical differentiation; underwriting spreads; investment banking; firm-underwriter matching; underwriting syndicates; analyst coverage
JEL Classification: G24, G32, L14, L15
Suggested Citation: Suggested Citation